1. AP Economics Mr. Bernstein Module 19: Equilibrium in the Aggregate Demand- Aggregate Supply Model March 12, 2015

2. AP Economics Mr. Bernstein Equilibrium in the Aggregate Demand- Aggregate Supply Model Objectives - Understand each of the following: The difference between short-run and long-run macroeconomic equilibrium The causes and effects of demand shocks and supply shocks How to determine if an economy is experiencing a recessionary gap or an inflationary gap and how to calculate the size of the output gaps 2

3. AP Economics Mr. Bernstein Short-Run Macroeconomic Equilibrium Equilibrium is reached through same adjustment process as in Micro supply/demand model Price is the adjustment mechanism; ie when P is > intersection AD and SRAS, a surplus exists and prices fall... Presumes economy is usually in state of short-run equilibrium 3

4. AP Economics Mr. Bernstein Shifts in AD: Short-Run Effects Demand Shock ie unexpected rise in stock market boosting Wealth Effect AD shifts to right Both P e and Y e increase 4

5. AP Economics Mr. Bernstein Shifts in SRAS: Short-Run Effects Supply Shock ie unexpected rise in commodity prices due to geopolitical problem SRAS shifts to left P e rises but Y e decreases SRAS shifts to right ie new technology P e falls and Y e increases 5

6. AP Economics Mr. Bernstein Long-Run Macroeconomic Equilibrium In Long Run all prices are flexible AD, SRAS and LRAS curves all intersect at Y p Y < Y p is known as a Recessionary Gap or negative output gap Y > Y p is known as an Inflationary Gap or positive output gap The distance between short-run Y e and Y p is the output gap: 100*(Y e – Y p )/ Y p The economy is self-correcting 6

7. AP Economics Mr. Bernstein Long-Run Macroeconomic Equilibrium 7